PenFed Rides the Wave and Pay Crest

It might seem a scene ripped out of a sci-fi novel. Within the year a Pentagon Federal Credit Union member will rush into a convenience store, grab a container of milk, and on the way out, will wave a smartphone at a clerk and speed out the door. No stop, no paper receipt.

“We definitely will roll this out this year, at least in pilots,” said Ben Scandlen, a PenFed spokesperson. “Our research tells us a substantial percentage of our membership are very interested in mobile payments. We got ahead of the curve with iPad apps, and that worked out great for us. We believe mobile payments will be a large technology change for financial institutions and we plan to be there. You don’t want to get left behind. We need to stay on top of mobile, everything is changing so fast.”

Scandlen is on the money. The word in mobile today is NFC, near field communication, which is a smartphone chip that enables payments on the fly. Thus, “wave and pay” is the NFC motto.

And it is happening now. ABI Research estimates that 35 million NFC-equipped phones will ship this year and twice as many will ship next. Google has publicly stated that newer Android phones will be NFC capable, and Android now has emerged as the decisive leader in smartphone market share.

Is paying with a credit card really that much of a bother that we need new technology? Scandlen explained: “Paying with a credit card of course isn’t difficult, but with a phone we can improve the process. The analogy is to the difference between a typewriter and a computer.” He added: “For instance, with NFC you won’t need checkout lines in stores.”

That is because stores will have special readers that instantly capture the customer’s NFC transaction, and the mobile customer can literally be out the door.

NFC goes well beyond making it easier to grab purchases on the run. “The vision is replacing the wallet with a NFC equipped phone,” added Vishal Jain, an analyst with research firm The 451 Group in London.

Think about that. From photos to loyalty program cards to credit cards, all the stuff in a wallet can easily be digitized and put on a smartphone. The next step, suggested Jain, is to win over consumers. “We now are at a stage where consumers need to gain confidence in the technology.”

“This process will take two to three years, we believe, but financial institutions need to get involved soon or risk losing revenue,” said Jain. He added that big global banks are, like PenFed, already well down the road to NFC trials.

Not many credit unions have taken the plunge, however, said Andrew Mikesell, the mobile commerce product director of Sybase 365, a provider of mobile commerce services.

For most credit unions, right now, NFC seems to be in its early days. But that may be changing, fast.

In some parts of the world, incidentally, mobile payments are already entrenched. “In Korea, for instance, you can buy movie tickets, meals, gasoline, all with a smartphone,” said Keith Smith, an executive with SK C&C, a Korea-based mobile commerce firm with offices in the U.S. “Big box retailers– McDonald’s, Home Depot–already are installing NFC readers here in the U.S.,” added Smith.

Huge technology players are also now piling onto NFC. Last week, stories swirled that Amazon is about to launch an NFC payments scheme, with transactions tied to users’ Amazon accounts. Google, meantime, is said to be conducting an unannounced pilot of NFC in New York and San Francisco and, supposedly, Google (whose Nexus S smartphone has NFC built in) has paid for the readers installed at pilot merchants. Neither company is confirming or denying the reports.

EBay, via its PayPal subsidiary, also is pushing into NFC, say technology sources, and AT&T and Verizon have disclosed they are moving forward with an NFC payments platform called Isis. Apple was heavily rumored to plan to build NFC into its latest iPhone launch. That did not happen, for reasons unknown, but in any discussion of NFC there is little doubt that Apple, too, plans to find a role for itself.

Momentum and consumer excitement all are building. This payments train definitely is leaving the station, said Jack Vonder Heide, president of Technology Briefing Centers, a consulting company. He explained that he believes we will see broad acceptance of NFC on the part of national retailers by mid-2012 and thus it will be critical for credit unions to gain experience beforehand, via pilots.

One big skeptical question looms, however. Hasn’t the tantalizing prospect of cashless mobile payments been floated before, only to evaporate without making a dent in the marketplace? A dozen years ago phonemaker Nokia demonstrated systems that let phone owners buy sodas from vending machines in Helsinki, with payment processed by cellphone carriers. The NFC standard itself in fact was adopted in 2003 but got exactly nowhere for many years.

Vonder Heide acknowledged that is true, but, he said, the difference with the powerful NFC chip technology is that it goes well beyond cash replacement. “NFC provides robust analytics. It’s a way to target the customers a merchant wants for specific discounts and rewards.” NFC lets merchants know more about their customers, at least the ones who opt in to a disclosure program, and the customer in turn will get offers more precisely targeted to his or her interests and buying history.

“Before, vendors sold mobile payment technology only as cash replacement and that was not enough for merchants or consumers. Now much more is offered with the NFC chips,” said Vonder Heide.

Enough so that we just may finally be entering the era of the wallet-less society? Vonder Heide believes so. “NFC has reached a critical mass. It’s become critical for credit unions to get involved,” he said.